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How to Use MACD Indicator to Trade Stock & Binary Options
MACD (usually pronounced Mac-Dee) stands for Moving Average Convergence Divergence.
The MACD is the difference between the value of the 12 period EMA (exponential moving average) and the 26 period EMA of the asset price.
In short, the MACD indicator gives the short to medium term trend of the price action. A positive MACD value indicates upward price trend while a negative MACD value indicates a downward price trend.
A 9 period EMA of the MACD is superimposed on top as a Signal Line. In other words, the Signal Line is just a smoothed out, less choppy version of the MACD line.
There is also a histogram which measures the difference between the MACD line and the signal line. The histogram can help to assess the velocity of the upward or downward movement.
Buy & Sell Signals
Buy signal is generated when the MACD line crosses above the signal line.
Conversely, a sell signal is generated when the MACD line crosses below the signal line.
MACD Divergence Strategy
Another strategy often employed by traders using the MACD to find trading opportunities is the MACD divergence strategy.
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When the MACD diverges from the price action, it can signal the end of a trend.
When the price is on an uptrend but the MACD is on a downtrend, it signals a bearish divergence, indicating that the market may soon be turning bearish.
When the price is on a downtrend but the MACD is on an uptrend, it signals a bullish divergence, indicating that the market may soon be turning bullish.
RSI (Relative Strength Index) Indicator Explained
The RSI or Relative Strength Index indicator is bounded momentum based technical indicator that attempts to predict a change in momentum. . [Read on. ]
MACD Indicator Explained
MACD (usually pronounced Mac-Dee) stands for Moving Average Convergence Divergence. The MACD indicator gives the short to medium term trend of the price action. [Read on. ]
Bollinger Bands Explained
The bollinger bands are adaptive trading bands that reflect changes in volatility and provide a better view of the true extent of the price action. [Read on. ]
Parabolic SAR Explained
The Parabolic SAR indicator (or PSAR) is designed to calculate the point in time when there emerges a better than average probability of a trend switching directions. [Read on. ]
ADX Indicator Explained
The ADX, or Average Directional Index measures the strength of a trend and can be useful to determine whether an asset is currently in a trending market or a ranging market. [Read on. ]
MACD entry strategy
This is one of best strategies for new traders. You can actually use it in different ways to determine trend and also reversals and of course signals for trading. Best time frames to use it are short but you can apply it to any time frame. The strategy itself deserves that their author is also written, in this case this is James Ayetemimowa. As we said, it is simple strategy that uses MACD. Good thing is that it follows the trend and uses more then one indicator to determine entry point which is great for binary options trading.
INDICATORS TO USE ONA CHART:
– 50 SMA (GREEN)
– 100 SMA (RED)
– MACD (DEFAULT SETTINGS – 12, 26, 9)
– 5 MIN or anything else you like
HOW IT WORKS:
As you can see the setup itself is simple and it is based on a 5 minute time frame so the signals come regulary. With the two moving averages you determine the trend, type of trade. These two SMAs determine your position, when the 50 bar SMA is above the 100 bar SMA means that the trend is bullish so it goes up. When the short 50 bar SMA is below the 100 bar SMA means that trend bearish and it will go down. As you can see, you only trade when this happens, you do not anticipate and trade before it crosses. You will see the signal will be made when the MACD is overbough or it will be oversold, that is when it will crossover and at the same time the price will go past the SMA. This means that when trend is downfall you will have to wait for price to correct itself above moving average. So when this event happens you will get signal when MACD oscillator is on the overbough side and of course makes bearish cross over. You can predict this cross over with MACD histogram. Check also the picture and you will see what i mean.
This is a very well thought strategy even for beginners as we said but that does not mean it is not good for expirienced traders aswell. You can use this strategy for every asset you wish to trade on any time frame basicly. But please have in mind money management at all times. As you see it also does not need to check multiple time frames but it will not hurt if you do your analysis since you can only benefit from that. Even though it is simple strategy it can be very well trusted since it give you the right trend and momentum from which you can see signals to use for binary options trading.
MACD Binary Options Strategy
MACD Binary Option Strategies makes use of one of the most effective trading indicators out there.
The Moving Average Convergence Divergence (MACD) is an indicator that incorporates trends and momentum.
The MACD has been proven its worth in the Forex and stock markets for a number of years and has been the staple tool for any technical analyst.
Yet the question remains, how effective is it when trading binary options?
We will take a look over some of the most effective MACD Binary Option Strategies.
What is the MACD Indicator?
The MACD was first developed in the 1970s by a man named Gerald Appel. It is a lagging indicator that is used to follow trends. The MACD consists of two exponential moving averages and a histogram. The MACD is calculated as the difference in the assets 26 day (slow) and 12 day (fast) Exponential moving averages (EMA). These indicators will use the closing price of the asset in their calculation.
Apart from the standard MACD indicator, there is also a 9 day EMA of the MACD that is plotted as well. This helps for the trader to decide whether they should be buying / selling. The general rule of thumb when it comes to the MACD indictor is that it is a bullish indicator when the MACD is above its 9 day moving average.
There is another indicator that is added to the MACD representation and that is the histogram. It is helpful as it is able to identify when the difference between the moving average and the MACD itself is positive / negative. It is easy to tell when looking at the histogram whether there is a bullish indicator or bearish indicator.
Interpretation of the MACD
The name says everything, the MACD is all about spotting periods when trends are either converging or diverging. Converging is when the price is going in the same direction of the underlying trends. Diverging is when the price is going in the opposite direction.
When looking at the MACD, when the short term EMA is above the long term indicator this is considered a divergence. It is a convergence when they are moving together.
Given that the MACD line is an oscillator, when the MACD line is above zero, this means that the short term EMA is moving away from the long term MA in a positive direction and this should be a bullish sign.
Similarly, when the MACD is below zero it means that the short term EMA is diverging away from the long term EMA but on the downside. This is a bearish indicator.
When the Signal line and MACD histogram are included, the binary options trader is able to get a lot more colour and is able to determine whether the MACD indicator itself is converging or diverging.
For example, if the MACD histogram is positive it means that the 9 period moving average of the MACD is above the MACD and could mean the MACD is still heading in a positive direction. The opposite can be said for a Moving Average that is below the MACD.
Taking a look at an example, in the image to the right, we have the EURCHF currency pair with the MACD lines plotted below. We have also plotted the price charts using candlestick indicators and moving averages above which are for indicative purposes. AS you can see, the MACD is calculated as the difference between the two moving average lines in the main price chart.
Looking more specifically at the indicator chart, the light blue line is the MACD indicator, the red line is the moving average of the MACD and the histogram is the difference between the two. In the cases when the MACD was positive and the Moving average of the MACD was increasing, this was a bullish sign for the trader.
Binary Option MACD Strategies
MACDs are a great indicator to use when trading binary options as they help to identify when momentum is strong and when it is tapering off.
When the trader sets the MACD periods to the option expiry periods, an even more accurate reading is presented. It will help the trader assess whether they should indeed enter the option up or down.
The MACD indicators can also be used when the trader wants to employ more exotic binary options such as one touch and no touch options.
Below we will run through some examples of binary option trades that you can embark on once reading the MACD indicator.
MACD 0 Line Crossover
A 0 line crossover, or “center line” crossover occurs when the MACD line goes from positive to negative. This is an indication that the asset may be moving from a situation of positive momentum to negative momentum and vice versa.
When the MACD crosses from negative to positive then this is seen as a bullish sign and is called a bullish crossover. On the other end, when the MACD crosses from positive to negative this can be a bearish indicator and is called a bearish crossover.
Indeed, a 0 line crossover may not be an indication that momentum has switched. For example, there may be a situation where the MACD will remain close to the 0 line for some time going forward. These are indeed hard to read and just show that momentum is currently quite limited.
Taking a look at an example of a binary options MACD crossover trade, below we have the price of Ether (USD) with the time period set to five minute candles. This was a Bullish crossover and was an indication that there was a move to positive momentum in the price of Ether.
In this case, the trader should consider entering a 5 minute binary option CALL on the price of Ether. As we can see, the next candle ended up closing considerably up from its open. This means that the CALL option would have ended up in the money and paid the trader off.
MACD Signal Crossovers
As mentioned above, the MACD signal line is very helpful as it allows the trader to spot when the MACD indicator may itself turn. This could then be a prelude increasing / decreasing momentum in the assets price as the MACD itself may turn.
In general, when the MACD line goes over and crosses the signal line, this is a bullish (positive). On the other side, when the MACD crosses the signal line to the downside then this is considered a bearish crossover and shows that momentum could be turning the other way.
If the trader was using a simple high / low binary option strategy, they would look to enter a PUT option in the case of a Bearish Crossover and they would enter a CALL option for a Bullish crossover.
In the below chart, we have the price of Gold with Candlesticks placed on a 2 minute horizon. Hence, the trader should consider 2 minute binary option trades as the instrument.
As you can see, there was a signal crossover and this was a Bullish crossover as the MACD has passed over the signal line. We can also see that the Histogram has reversed and is now positive.
As this is a bullish signal with momentum reversing to the upside, the trader should place a 2 minute binary CALL option on the price of gold. Indeed, the trade would have expired in the money as the closing price of the candle was above the opening price.
Although trading binary options with the MACD can indeed be profitable, the trader needs to be careful placing trades when the MACD line is at all-time highs or lows.
MACD Momentum Divergence
A MACD divergence occurs when the movement of the price is different from that which is being demonstrated by the MACD indicator itself. This is usually a sign that the momentum is indeed tapering out and should make traders weary. As we have mentioned, momentum is a key ingredient in a trend continuing its trajectory.
Hence, if the binary options trader is to observe a divergence between the MACD and the underlying price then this is an indicator that they should consider placing a trade that is contrary to the trend. A reversal from the current trend in the price is indeed possible.
There are two types of MACD divergences. There is the Bullish divergence which occurs when the price of the asset continues reaching lower lows but the MACD indicator itself records a higher low. A bearish MACD divergence occurs when the price of the security reaches a higher high but the MACD indicator is recording a lower high.
Taking a look at a MACD convergence example, on the right we have the 10 minute chart of the S&P 500 index as well as the MACD indicator below. As you can see, the index is reaching higher highs but the MACD seems to be reaching lower highs. This is an indication that some of the momentum behind the price move is indeed eking out.
The trader should therefore consider entering a 10 minute Binary PUT option on the S&P 500. Of course, it is quite difficult to ascertain when this should exactly be done as we can see that the price kept on climbing even though the MACD was falling. At this stage, it should be an indication to avoid a CALL option trade at this point.
However, there appeared to be a Bearish MACD signal line crossover. In this case it appears to be occurring at the same time that we are having a bearish divergence. At this stage, the trader should place a 10 minute Binary PUT option in expectation of a fall in the price.
Indeed, if the trader had done this, the option would have expired in the money as the candle closed down below the open. The trade would have ended profitably and paid the trader out.
These MACD strategies have worked effectively for a number of years and are borrowed from traditional forex and stock trading. However, even if you think that you have a perfect opportunity to enter a trade, you have to take into account other technical factors which could also have an impact on the price at that point in time.
It is also advisable not to embark on a strategy like this if you don’t have an understanding of the basics of binary options. Similarly, when using a binary options trading strategy, you need to also make use of a money management strategy. This is because profitability is impacted by more factors than just what trade is placed.
The trader will need to be measured in the amount that they would like to stake on each trade as well as know when to stop trading if the MACD binary option strategy is going contrary to expectations. Using a combination of different trading disciplines is a surefire way to trading binary options profitably.
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